Court Upholds Constitutionality of Pennsylvania Recording Statute

A class action suit against Mortgage Electronic Registration Systems (MERS) in Pennsylvania will go forward after a federal district court ruled that the state recording statute is constitutional. The court ruled that the statutory recording requirements are "patently clear."

The plaintiffs, a class of county recorders of deeds, seek an injunction against the use of the MERS recording registry and compensation for money that would have been paid to the counties if transfers of security interests had been recorded in the county recorder's office, as the plaintiffs claim is required by the statute.

The court's ruling, issued on April 22, 2014, denied MERS's motion for summary judgment. MERS argued that the recording statute was unconstitutionally vague because it does not provide clear direction about what must be recorded, as well as when and by whom. The court rejected that argument and ruled that the statute clearly requires parties to record "mortgages and mortgage assignments" in the county recorder's office. It also found that the statute clearly provides that the parties must record transfers within 90 days. Finally, it rejected MERS's contention that the statute "lacks objective standards" leading to "arbitrary application" and "confusing" enforcement.

The decision differs from the conclusions drawn by other courts. Recent decisions by the U.S. Courts of Appeals for the Seventh and Eighth Circuits have rejected unjust enrichment claims by county recorders' offices. In January, the Seventh Circuit affirmed the dismissal of an unjust enrichment claim, holding that MERS engaged in no "unlawful act" that could permit the county recorders to recover for unjust enrichment. Similarly, in December, the Eighth Circuit rejected an unjust enrichment claim by county recorders on the grounds that MERS had no duty to record the transfers of security interest with the county recorder's office.

- Robert A. Scott and Melanie J. Vartabedian


CFPB Issues Proposed Amendments to Mortgage Rules

The CFPB recently published a Proposed Rule offering three specific amendments to the 2013 Title XIV Final Mortgage Rules. The proposed amendments respond to concerns about origination and servicing issues. 

In particular, the Proposed Rule would:

  • Create a limited, post-consummation cure mechanism for mortgage loans thought to be qualified mortgages (QMs) at origination but that actually exceed the points and fees limit for QMs
  • Provide an alternative definition for the term "small servicer" that would apply to certain nonprofit entities that service mortgage loans
  • Amend the ability-to-repay (ATR) requirements to allow certain subordinate-lien loans originated by nonprofit creditors to be excluded from the credit extension limit used for determining whether a nonprofit is exempt from the ATR requirements

QM Points and Fees Amendment

QMs are afforded important consumer protections under the ATR rule (such as a rebuttable presumption of compliance with the ATR rule or a safe harbor from liability under the rule). Generally, to be considered a QM, a mortgage loan must not contain points and fees that exceed 3 percent of the loan if the principal is $100,000 or more. The Proposed Rule addresses the scenario when a lender may be under the assumption that it has originated a QM but later discovers that the points and fees exceeded the 3 percent (or other applicable) cap. The CFPB notes that the points and fees concept is complex and may result in certain items, such as discount points, mortgage insurance premiums and loan originator compensation, being improperly excluded from points and fees. 

The Proposed Rule creates a procedure permitting the lender to refund the excess points and fees amount to the borrower within 120 days and keep the loan's QM status. The lender must also maintain and follow policies and procedures for reviewing the loans and providing refunds to borrowers. Further, the lender must have originated the mortgage loan in good faith as a QM. The Proposed Rule also lists examples of factors that may be evidence that a loan was or was not originated in good faith as a qualified mortgage. For example, if the loan pricing is consistent with pricing on QMs originated by the same lender, this factor could serve as evidence that the loan was originated in good faith as a QM.

The CFPB states that the proposal is meant to encourage lenders to maintain healthy access to consumer mortgage credit. The preamble to the rule acknowledges that some lenders and secondary market participants have decided not to make or purchase loans with points and fees close to the 3 percent cap in fear that they may inadvertently exceed the limit. To be sure, the points and fees cure provision will be welcomed by market participants and signals that the CFPB is willing to respond to industry concerns.

Alternative Small Servicer Definition

Under the RESPA-TILA mortgage servicing rules, "small servicers" (as defined by the servicing rules) are exempt from certain provisions of the rules if they service 5,000 or fewer mortgage loans annually and meet other requirements. The CFPB states that it has learned of situations where nonprofits receive fees to service loans for other associated nonprofit lenders. The CFPB notes that due to this unique structure, such nonprofits may not be able to qualify for the small servicer exemption. Consequently, the Proposed Rule offers an alternative definition of a small servicer that would allow certain nonprofits to continue to consolidate their servicing activities with associated nonprofits while maintaining their exemption from some of the mortgage servicing provisions.

Nonprofit Lender Exemption from ATR Provisions

Under the ATR rule, certain nonprofits that make mortgage loans to low- or moderate-income borrowers are exempt from certain provisions of the rule if they make no more than 200 dwelling-secured loans per year. The nonprofit lenders must also currently meet other specific requirements. The Proposed Rule amends the exemption so that interest-free, forgivable, subordinate lien loans for down payment assistance and certain other purposes (so-called "soft seconds") would not count toward the annual 200-loan limit.

Request for Additional Comments

The CFPB also requested comments on two additional issues: (1) whether and how to provide for a cure provision for QM loans that inadvertently exceed the 43 percent debt-to-income (DTI) ratio required under the ATR rule; and (2) feedback from small creditors regarding how the new rules have affected originations and operations.

Comments are due on the three substantive proposed changes to the final rule within 30 days after the rule is published in the Federal Register. Commenters have 60 days after publication to provide responses to the CFPB regarding the DTI cure provision and the impact the new mortgage rules have on small creditors. The CFPB proposes that the rules, once finalized, become effective 30 days after publication in the Federal Register, although the CFPB seeks comment on whether it should adopt an alternate effective date.

 


 

CFPB Releases Second Fair Lending Report

The CFPB released its second Fair Lending Report to Congress last week, summarizing the Bureau's fair lending actions in the last year and a half. The report highlighted the Bureau's creation and implementation of a risk-based fair lending prioritization process that is aimed at ensuring that its resources are focused on areas that present the greatest fair lending risk to consumers. This data-driven prioritization for fair lending scrutiny, part of the Bureau's larger risk-based prioritization process, incorporates several factors: 

  • Complaints and tips from consumers, advocacy groups, whistleblowers, and other government agencies at all levels of government
  • Information from the Bureau's and other regulators' prior fair lending work, including any supervisory or enforcement actions
  • Quality of an entity's fair lending compliance management system
  • Data analysis of trends at the entity and market level to determine which entities seem to present heightened fair lending risk to consumers
  • Market-specific insights to identify fair lending risks that may require further study or action

The report further specifies that a well-developed compliance management system should include the following features:

  • An up-to-date fair lending policy statement
  • Regular fair lending training for all employees involved with any aspect of the entity's credit transactions, as well as all officers and board members
  • Ongoing monitoring for compliance with fair lending policies and procedures, and appropriate corrective action if necessary
  • Ongoing monitoring for compliance with other policies and procedures that are intended to reduce fair lending risk (such as controls on loan originator discretion), and appropriate corrective action if necessary
  • Review of lending policies for potential fair lending violations, including potential disparate impact
  • Depending on the size and complexity of the financial institution, regular statistical analysis, as appropriate, of loan-level data for potential disparities on a prohibited basis in pricing, underwriting, or other aspects of the credit transaction, including both mortgage and non-mortgage products such as credit cards, auto lending, and student lending
  • Regular assessment of the marketing of loan products
  • Meaningful oversight of fair lending compliance by management and where appropriate, the financial institution's board of directors

The report outlined the Bureau's supervision and enforcement work in housing and automobile finance, two key product areas for fair lending risk that were identified using the Bureau's prioritization process. During the time period covered by the report, the Bureau's enforcement activity resulted in three mortgage-related referrals to the U.S. Department of Justice (DOJ) (two of which involved discrimination on the basis of marital status), and several public enforcement actions for ECOA and HMDA violations. The Bureau's auto finance scrutiny focused on pricing and dealer compensation policies. The Bureau also monitored fair lending risk to consumers in other product markets, such as unsecured consumer lending and credit cards. The Bureau referred three such lenders to the DOJ for ECOA violations, and pursued its own enforcement action against a company that allegedly engaged in discrimination on the basis of age. The report also lays out the Bureau's cooperation and coordination with other federal agencies and state regulators to promote consistent, efficient, and effective enforcement of fair lending laws. For example, the CFPB-DOJ Memorandum of Understanding was finalized to streamline coordination on enforcement actions. The promulgation of interagency guidance and participation in interagency working groups also further cooperation between agencies, and further the Bureau's enforcement of fair lending laws.

The report also discusses the Bureau's outreach to private industry and fair lending, fair housing civil rights, consumer and community advocates. To this end, the Bureau relies on the Consumer Advisory Board to advise and consult, and to provide information on emerging practices in the consumer financial products or services industry. The Consumer Advisory Board hosts public sessions and small gatherings with industry, advocates and consumers, focusing on issues relating to fair access to credit for consumers.

As we reported previously, several members of the House Committee on Financial Services expressed their concern as to the Bureau's lack of transparency regarding its disparate impact analysis, and this report does not clarify the Bureau's position or answer the members' questions. Despite mentions of the Bureau's use of statistical analysis to prioritize its enforcement and supervision actions, this report does not answer the Committee's questions regarding the Bureau's specific methodologies in its disparate impact analysis. The report also does not address the Committee's broader concern regarding decreased consumer choice as a result of regulatory overreach or lack of transparency. We will continue to keep a close eye on these issues.


 

N.Y. DFS Becomes First State Regulator To Bring Dodd-Frank UDAAP Action

The head of the New York Department of Financial Services (DFS) recently became the first state regulator to use his authority under Dodd-Frank Section 1042 to bring a civil action for a violation of its prohibition of unfair, deceptive, or abusive acts or practices (UDAAP). Just last month, the Illinois Attorney General became the first state attorney general to file a state court lawsuit under this section of the law.

DFS Superintendent Benjamin Lawsky filed his complaint in New York federal court against a large subprime auto lender and its CEO and president seeking damages and injunctive relief under Sections 1031 and 1036 of Dodd-Frank, Sections 309 and 408 of the New York Financial Services Law, and Section 499 of the Banking Law. The DFS also obtained a temporary restraining order after alleging that the defendants "systematically hid from its customers the fact that they have refundable positive credit balances and then failed to refund those balances unless specifically requested."

In addition, the complaint alleged that the lender submitted false unclaimed property reports to the New York State Comptroller's Office denying that certain customers had positive credit balances. The DFS charged that the alleged misappropriation of the account balances totaled "millions of dollars."

The complaint also asserted that the defendants lacked basic information security measures, placing at risk consumers' most sensitive personally identifiable information. The DFS charged that hard-copy loan files were routinely left unattended in the office for prolonged periods and that backup tapes containing customers' personally identifiable information were taken home daily by the executive vice president. In fact, the DFS alleged that the lender lacked "documented policies and procedures for virtually all of its operations."

Similar to most other states' laws prohibiting unfair or deceptive acts or practices (UDAP), Section 349 of New York's General Business Law only allows UDAP actions to be filed by the state's attorney general. Accordingly, by allowing the DFS and other state regulators to bring UDAAP claims, Dodd-Frank has given state regulators a significant new weapon. (Section 1042 authorizes state regulators to sue "any entity that is State-chartered, incorporated, licensed, or otherwise authorized to do business under State law." It does not authorize state regulators to sue national banks or federal savings associations.)

In the UDAAP counts of its complaint, the DFS claims that the defendants' alleged conduct is "unfair, deceptive and/or abusive" acts or practices under Sections 1031 and 1036 of Dodd-Frank. This is different from how the Consumer Financial Protection Bureau typically pleads UDAAP claims. Specifically, the CFPB tends to identify whether the alleged act is unfair, deceptive, or abusive, and not interchangeably group the terms.

We have consistently predicted that the DFS would be the first agency to take advantage of its new authority under Section 1042. As we mentioned in an industry webinar last week, Mr. Lawsky has repeatedly emphasized his intent to "push the envelope" and foster a "healthy competition" among state regulators to protect consumers. As the DFS lacks authority to bring a UDAP action under New York law, we anticipate that Mr. Lawsky will continue to aggressively employ Section 1042 to target certain types of consumer financial services providers.

The lawsuit is another example of the increased emphasis on holding individuals accountable for alleged company misconduct. Both the CFPB and DFS have made clear that to properly deter future misconduct, the enforcement action cannot solely target the company.

- Justin Angelo  


Georgia and Wisconsin Exempt Nonprofits and Their MLOs from Licensing Laws

Georgia and Wisconsin recently amended their state licensing regimes to create exemptions for nonprofits and their MLOs. Exemptions from these licensing requirements will ease the entry of many nonprofit lenders into these states and provide relief from certain ongoing compliance requirements.

In Wisconsin, the 2013 Wisconsin Act 360 (Act 360) provides that bona fide nonprofit organizations that do not operate in a commercial context and their MLOs are no longer required to be licensed under the Mortgage Bankers, Loan Originators, and Mortgage Brokers Act. Similarly, Georgia's House Bill 750 modifies the Residential Mortgage Act (RMA) to create an exemption to MLO licensing requirements for employees of nonprofits that make mortgage loans to promote homeownership or improvements for the disadvantaged. The Georgia RMA already contained an exemption for nonprofits that promote affordable housing.

Both states changed their state law to match an exemption for MLOs in Regulation H (CFPB Safe Act Rule). Under this regulation, a state MLO license is not required for an employee of a bona fide nonprofit organization who engages in the business of an MLO in the course of his or her work and who acts as a loan originator only in the origination of residential mortgage loans with terms that are favorable to the borrower. Regulation H also outlines a set of criteria an organization must meet to be defined as a "bona fide nonprofit organization." In particular, the Georgia RMA relies heavily on the language of Regulation H to define its exemption for MLOs.

In addition to nonprofits and their MLOs, the Wisconsin Act 360 includes new licensing exemptions for the following entities and individuals:

  • Federal, state, and local government agencies and their MLOs
  • Housing finance agencies and their MLOs
  • Mortgage bankers that meet the described "de minimus" exemption
  • Certain attorneys
  • MLOs that are not regularly engaged in the business of an MLO
  • Real estate brokers in certain circumstances

The amendments are effective immediately.

- Marc D. Patterson


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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.


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